Australia’s main wholesale electricity market has been suspended by regulators in the latest sign that the crisis threatening the stability of energy supplies is deepening.
The Australian Energy Market Operator (Aemo) took the drastic step of suspending the entire national electricity market for the first time in its history on Wednesday.
“Aemo has determined that it is necessary to suspend the spot market in all regions [of the NEM] because it has become impossible to operate” the market within the rules, the regulator said. The NEM covers all of Australia except for the Northern Territory and Western Australia.
AEMO today announced that it has suspended the spot market in all regions of the National Electricity Market from 14:05 (AEST), under the National Electricity Rules. Our statement here: https://t.co/hiYAKFl7Lt pic.twitter.com/AMNgE8zItj
— AEMO (@AEMO_Energy) June 15, 2022
In the hours prior to the suspension, Aemo had issued a flurry of lack of reserve alerts at the level 3 warning for all the mainland states within the market.
“Prior to suspending the market today, Aemo had issued over 5,000MW of directions and that is roughly 20% of demand,” Aemo’s chief executive, Daniel Westerman, said in Adelaide.
On Wednesday evening, the NSW energy minister, Matt Kean, told Sydney residents to reduce usage between 5.30pm and 8pm to reduce the risk of blackouts.
The latest Aemo forecasts for potential shortfalls in supply cited 8.30pm as a period of concern and flagged a possible intervention to order more generation as late as an hour earlier.
Updated forecast for NSW from @AEMO_Energy … pic.twitter.com/E3aRj0FPgi
— Peter Hannam (@p_hannam) June 15, 2022
“If there is an opportunity to reduce their energy usage like not using their dishwasher until they go to bed, that would help,” Kean told NSW consumers.
A number of coal-fired power stations that were expected to be working on Wednesday night had not come online, he said. The Vivid Sydney event, with light shows around the city’s harbour region, would still proceed.
The market scheme to pay big energy users to cut their power use had also been activated in NSW on Wednesday, Aemo said.
Significant shortfalls in Victoria, Queensland and South Australia were avoided on Wednesday but more were forecast for Thursday.
Victoria’s energy minister, Lily D’Ambrosio, said the market suspension was “to protect energy users and put certainty back into the market”.
“It is disappointing that energy generators were potentially gaming the system and not utilising the options available to them – this behaviour is unacceptable and will be investigated,” D’Ambrosio said.
The market suspension came as Aemo and other members of the Energy Security Board – the energy market commission and the energy regulator – were scheduled to have an urgent meeting on Wednesday afternoon with generators to discuss supply. Aemo, as the meeting’s host, cancelled the gathering once it decided to suspend the spot market.
Both the commission and the regulator had in the past day reiterated the importance of generators providing supply to the tight market, even with price caps of $300/MWh now imposed on all five states.
Generators have denied gaming the market by withdrawing supply, saying the price caps had affected the profitability of some bids but they would follow orders if instructed to generate power to avoid blackouts.
The federal energy minister, Chris Bowen, has previously warned power generators that anyone using the current crisis to engage in market manipulation will face action from regulators wielding the “full force of their powers”.
Bowen has previously blamed former Coalition governments for a “decade of denial and delay” and almost 24 energy policies that they failed to implement. In the absence of a national scheme, the states have increasingly pursued their own policies, particularly to encourage the uptake of renewable energy to cut carbon emissions but also to replace ageing coal plants that were mostly nearing the end of their designed operational lives.
In a statement, Westerman noted that about 3,000MW of coal-fired power plant capacity was offline through unplanned outages alone, while others were having scheduled maintenance breaks. The early onset of winter had also increased demand for electricity and gas, while wind and solar energy output had been down at times.
“In the current situation suspending the market is the best way to ensure a reliable supply of electricity for Australian homes and businesses,” Westerman said.
“The situation in recent days has posed challenges to the entire energy industry, and suspending the market would simplify operations during the significant outages across the energy supply chain.”
The market suspension was temporary, but it is unclear when it will resume under normal rules.
“We are seeing very challenging times … the market is not able to deal with all the factors thrown at it,” Westerman said. “Frankly those factors are quite extreme.”
The imposition of price caps across the market starting from last Sunday in Queensland – as required under the rules once spot prices exceeded a set threshold – was a key reason the market broke down, said Dylan McConnell, an energy expert at the University of Melbourne.
“If not for those price caps, we wouldn’t be here now,” McConnell said.
The cap set at $300MWh to protect consumers was less than the cost of generation for some plants. As a result, there was a “runaway” process of ever more suppliers pulling out of the market only to then be instructed to provide power by the regulators, he said. “That feedback loop really escalated in the past 48 hours.”
Paul McArdle, an analyst with Global-Roam and author of the WattClarity website, said the market suspension was “certainly on the cards” the way it had been operating in the past few days.
“The question is, does it make it work better given the underlying physical problems,” McArdle said.
The spate of shortfalls warnings did not imply blackouts were close given the ability of regulators to demand supply. “You shouldn’t scare the troops,” he said.
McArdle said the suspension was needed because under the existing rules the price threshold could have lasted weeks if not longer. The price limits are imposed when spot prices reach almost $1.4m over 2016 five-minute intervals over a rolling seven-day period.
When the market was suspended, prices in Queensland had topped $9m, NSW about $8m, Victoria $4.5m and South Australia $3.9m, he said.
The managing director of consultancy Energy Edge, Joshua Stabler, said the way the Australian Energy Markets Commission compensated generators forced to supply electricity at a price lower than their costs had fed “distrust” among suppliers.
“It’s that lack of trust in terms of how they are getting paid that causes the issue,” Stabler said prior to the market’s suspension.
On the one hand, companies forced to use high-cost gas would be losing money by using it to generate electricity. At $40 a gigajoule, the cost of producing a MWh of power would be about $440 but the price cap was only $300.
Stabler said the public messaging needed to be sorted out, not least because the market strains could last through winter.
“The response to the threat makes it look like we’re in a blackout state when we’re not,” he said.
